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Finance Dictionary and Glossary of Investment Terms
Convertible Bond
Definition 1.
A bond that can be converted into a predetermined amount of the company's equity at certain times during its life. Convertibles are sometimes called CVs.
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Definition 2.
A corporate bond, usually a junior debenture, that can be exchanged, at the option of the holder, for a specific number of shares of the company's preferred stock or common stock. Convertibility affects the performance of the bond in certain ways. First and foremost, convertible bonds tend to have lower interest rates than non-convertibles because they also accrue value as the price of the underlying stock rises. In this way, convertible bonds offer some of the benefits of both stocks and bonds. Convertibles earn interest even when the stock is trading down or sideways, but when the stock prices rise, the value of the convertible increases. Therefore, convertibles can offer protection against a decline in stock price. Because they are sold at a premium over the price of the stock, convertibles should be expected to earn that premium back in the first three or four years after purchase. In some cases, convertibles may be callable, at which point the yield will cease.
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Definition 3.
General debt obligation of a corporation that can be exchanged for a set number of common shares of the issuing corporation at a prestated conversion price.
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Definition 4.
A bond that can be exchanged at the option of the holder into preferred or common stock at a preset ratio. (See common stock, preferred stock)
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